Financial Review

Neutrality Matters

Financial Review by Sinclair Noe

DOW – 10 = 18,214
SPX – 3 = 2110
NAS + 20 = 4987
10 YR YLD + .05 = 2.01%
OIL – 2.01 = 48.98
GOLD + 5.00 = 1210.20
SILV – .01 = 16.63

The Federal Communications Commission has voted to regulate broadband Internet service as a public utility. Tom Wheeler, the commission chairman, said the FCC was using “all the tools in our toolbox to protect innovators and consumers” and preserve the Internet’s role as a “core of free expression and democratic principles.”


The new rules, approved 3 to 2 along party lines, are intended to ensure that no content is blocked and that the Internet is not divided into pay-to-play fast lanes for Internet and media companies that can afford it and slow lanes for everyone else. Those prohibitions are hallmarks of the net neutrality concept.


Mobile data service for smartphones and tablets, in addition to wired lines, is being placed under the new rules. The order also includes provisions to protect consumer privacy and to ensure that Internet service is available for people with disabilities and in remote areas.


The FCC is taking this big regulatory step by reclassifying high-speed Internet service as a telecommunications service, instead of an information service, under Title II of the Telecommunications Act. The Title II classification comes from the phone company era, treating service as a public utility. But the new rules are an à la carte version of Title II, adopting some provisions and rejecting others. The FCC will not get involved in pricing decisions or the engineering decisions companies make in managing their networks.


The impact of the new rules will largely hinge partly on details that are not yet known. The rules will not be published for at least a couple of days, and will not take effect for probably at least a couple of months. Lawsuits to challenge the commission’s order are widely expected.


Also today, the FCC approved an order to pre-empt state laws that limit the build-out of municipal broadband Internet services. The order focuses on laws in two states, North Carolina and Tennessee, but it would create a policy framework for other states; about 21 states have laws that restrict the activities of community broadband services.


The FCC says state laws unfairly restrict municipal competition with cable and telecommunications broadband providers. This order, too, will surely be challenged in court.


What does net neutrality mean for you? Well, you will still get your internet service from your provider; they just won’t be able to charge you more for high bandwidth, they can’t discriminate, and they can’t just block or slow access to content on a whim – which has happened in the past. That means that some geek in a garage has the same access to the internet as a big company like Netflix or Hulu; and as we’ve learned over the years, geeks in garages sometimes come up with some brilliant stuff. And nothing in today’s FCC action will raise your taxes.



We’ve been hearing from certain pundits for years now about how high inflation was just around the corner; how the Federal Reserve’s low interest policy and massive monetary stimulus would inevitably lead prices to spike, undermining the economic recovery. The hyper-inflationistas were dead wrong. Consumer prices fell again in January and inflation turned negative year over year. The consumer price index dropped a seasonally adjusted 0.7% last month, marking the third decline in a row. Over the past year prices have actually declined by an unadjusted 0.1%, the first time consumer inflation has been negative since the fall of 2009. Energy prices slumped 9.7%, as the cost of most fuels including gas decreased. Food prices were unchanged. Excluding food and energy, so-called core consumer prices rose 0.2% in January. Core prices are also up 1.6% in the past year, mainly reflecting rising prices for housing. Deflationary pressure from the cost of energy and commodities falling has turned into deflation. Whether this is temporary or a longer-term trend remains to be seen.

As a reminder, the Federal Reserve has that 2.0% inflation target, which is nowhere in sight. Until inflation ticks back up, it is hard to imagine that Janet Yellen and her team will raise interest rates rapidly. Even if they start raising rates sooner than expected, it is hard to fathom that this interest rate hiking cycle will be anywhere as severe as what we saw during the 1990s and in other rate hike cycles. Still, the Fed doesn’t expect energy prices to stay low forever. There is little fear that it will lead to an insidious debt-deflation spiral.


For the moment, lower prices, especially lower energy prices are a good thing. Today, oil prices dropped to the lowest levels in a month; a combination of a stronger dollar and a report yesterday showing record high crude supplies in the US. And it’s not just lower prices at the pump and lower energy bills, the cost of inputs, from plastic bottles to detergent, are edging down. Some of the savings are being passed on: food, which is costly to transport and requires a lot of packaging, is cheapening. These are the hallmarks of a positive supply shock: cheap oil means economies can provide more goods at lower prices. In the services sector, which relies much less on energy, transport and oil-based inputs, prices are still rising.

For companies that sell durable goods deflation can be more of a concern, but so far it hasn’t been a problem.  Orders for durable goods rose a seasonally adjusted 2.8% in January, beating expectations. Orders minus transportation edged up 0.3%. Orders for core capital goods, a proxy for business investment, surged 9.5%.


For many industries, however, falling prices are not new, but a way of life; think about how prices have dropped for technology like phones, cameras, and computers. So deflation is unlikely to shock shoppers. Indeed, the boost in purchasing power from a short period of falling prices is welcome, especially for workers that have seen wages stagnate for decades. Unemployment rates are now below pre-crisis levels and that should have triggered rising wages but we haven’t seen it yet. The number of people who applied for unemployment benefits jumped by 31,000 to 313,000 in the week ending Feb. 21. It was the biggest weekly increase since December 2013. Next week’s jobs report will likely show another solid gain, but there is still slack in the labor market. Jobs may be up but workers’ bargaining power is not.


Even if it is short-lived, this sort of deflation can dull an economy. Companies are sitting on mountains of cash, about $2 trillion more or less; A little inflation would serve as a prod to put that money more quickly to use. This raises a question about how to spark inflation. Over time, the answer is more jobs; more people with paychecks spend more money, creating more demand; and increased demand is the best incentive to invest.


If falling prices endure, then debts, fixed in nominal terms, are harder to pay. And the whiff of deflation is everywhere, not just in the US but around the globe. And we have seen central bankers responding: with Abenomics in Japan, stimulus in China, QE from the ECB, and negative interest rates across much of Europe. If these attempts fail, then the glee at cheap food and fuel will be short-lived, as debt-ridden economies find themselves using up all the savings from falling prices to keep creditors at bay. And the side effect of central bank stimulus is to devalue the local currency, which has resulted in a much stronger US dollar, which means our exports have to be priced competitively and imports are cheaper; which all means that deflation, even a little deflation can be a tricky thing. Enjoy it while you can.



Earnings season is winding down with reports from retailers. JC Penney reported sales rose 4.4%, topping estimates; that was not enough. JC Penney reported a loss of $59 million, or 19 cents a share.


Sears Holdings lost money for an 11th straight quarter. The company lost $1.50 per share, beating the expected loss of $1.89 per share. Sales dropped 24% to $8.1 billion, short of the $8.3 billion estimate.


Gap said profit rose nearly 4% to $319 million, or 75 cents a share, while sales increased nearly 3% to $4.7 billion. Gap offered a muted earnings forecast for the year, blaming the impact of the stronger dollar and shipping delays at West Coast ports. Separately, Gap said it is increasing its annual dividend and that it is setting aside $1 billion to buy back shares.


Google is making its largest bet yet on renewable energy, a $300 million investment to support at least 25,000 SolarCity rooftop power plants.  Google is contributing to a SolarCity fund valued at $750 million, the largest ever created for residential solar. Google has now committed more than $1.8 billion to renewable energy projects, including wind and solar farms on three continents. What really makes the deal interesting is that technology companies are now taking advantage of investment formats once reserved only for banks. The Google deal is structured as a tax-equity transaction, meaning Google gets tax breaks that flow from solar systems financed by the fund. Renewable-energy projects are entitled to various tax benefits, including a credit for 30% of the installed cost of a solar power system. Unprofitable companies, such as SolarCity, often can’t use the credits and provide them instead to tax-equity investors.


Just a week after apologizing for bundling computers with an encryption-breaking adware program known as Superfish, Lenovo said a cyberattack took down its website, although it was not clear who was behind the breach. Hacker group Lizard Squad, which has taken credit for several recent high-profile outages, including Sony’s PlayStation Network and Microsoft’s Xbox Live, has claimed responsibility for the attack.

(I guess we can file that one under “K” for karma, or maybe “P” for payback.)



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